Carphone Warehouse is expected to admit this week that it has been a victim of intensifying competition in the broadband market by revealing that uptake of its “free” product has suffered a sharp slowdown. The group, which is fighting competition from big names including BSkyB, the satellite broadcaster that is 39.1 per cent owned by News Corporation, parent company of The Times, is expected to disclose in a trading update on Wednesday that net additions for broadband in its second quarter have dropped to as little as 95,000, from 126,000 in the last quarter.

Carphone triggered a broadband price war when it launched a service last summer that was “free” to consumers subscribing to its TalkTalk £20.99 phone calls package.

The move marked the latest in a series of steps by Carphone to transform itself from a simple mobile phone retailer into a leading home communications player.

However, the “free” idea has been widely emulated by rivals. In addition, although the broadband market is fiercely competitive, new players are entering it: O2, Britain’s biggest mobile operator, announced plans last week to extend into the fixed-line internet domain.

Carphone’s slowing customer numbers are expected to be offset by strong progress on transferring customers on to its own network – a key test of the profitability of the service. The communications group makes a loss of around £5 per month on each customer who takes on the BT wholesale product. It becomes profitable only when these customers are connected to Carphone’s own network.

In the early days of its service the group struggled to cope with overwhelming demand and was faced with costly problems, including difficulties in transferring customers. Dresdner Kleinwort is predicting that migrations on to Carphone’s network will be “strong,” while Collins Stewart thinks there will be a “decent step forward in profitability” in the broadband service.

Connections in the group’s core mobile handset distribution business are expected to slow after unusually high growth in the last quarter. Carphone’s success recently in securing a deal – alongside O2 – to sell Apple’s iPhone in the UK should help to provide the group with a boost in sales over the forthcoming important Christmas trading period.

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